Growth Maniacs’ Bhalle, Bhalle, Shit!

Reserve Bank of India Governor, D Subbarao, is a much hated man these days. He is seen as the man, who may spook the great Corporate party that P Chidambaram [PC] and Man Mohan Singh [MMS] have so meticulously organized. PC’s exhortations for interest rate reduction did not enthuse RBI, which left them unchanged though reduced Cash Reserve Ratio by 0.25% to ease liquidity [i.e. increase availability of money that can be lend]. Finance Minister made his displeasure publicly known because RBI did not heed his direction. The pressure on India to throw open its economy without let or hindrance to global capital that is gasping for growth asphyxiated by sticky debt crisis in Europe and USA is enormous. The UPA-II government has been rudely awakened by threats of ratings’ down grades by Credit Rating Agencies, and by gloomy predictions by IMF and World Bank to deliver what global capital wants. On cues from global capital’s international henchmen, its local minions too have joined the chorus. A case in point is the article in Indian Express, RBI – The Lone Ranger Syndrome, by someone who is hailed as brilliant economic analyst by its editor in chief. The scorn that is heaped on RBI is unmistakable: ^^The other positive and important macro reality in India is that the change in the level of inflation, again no matter how measured, is structurally down from its more than double-digit levels to something close to 5-7 per cent. Core inflation, we are told, is now “sticky” at around 5.5 per cent. Given that our long-term target is for inflation to be around 4-5 per cent, I would have thought that this stickiness was virtuous…..But no country is growing normally in 2012. When growth is considerably below normal, so are short-term rates, and negative real rates is the reality in most countries, developed and developing….Now there are precious few, if any, empirical studies worldwide showing any relationship between savings rates and real deposit rates. But there are several studies which indicate that savings rates are positively associated with the rate of growth of income. And since the RBI is fond of quoting that real interest rates were higher during the high growth period of 2003 to 2007 (factually wrong but never mind), it should also note that this was the period savings rates galloped from 23 per cent of GDP to some 13 percentage points higher!^^.  Is RBI lying as author suggests? But before answering that one must take note of the hankering for negative interest rates [when inflation adjusted nominal interest rate drops below zero]. Without considering peculiarities of individual economies, such blanket statements harm rather than help. Secondly, it is like paying the borrower for borrowing because the real value of money he returns would be less than what he had borrowed. Such cheap money policy, first made permanent by Alan Greenspan, has been going on for more than a decade in USA. It helped create an asset bubble in real estate and then created a much bigger bubble through endless leveraging in the financial industry. It also spurred already unsustainable consumption to suicidal heights. Then it brought down the whole US economy and also triggered a global crisis. Also the negative interest rates have not helped any of the developed countries to get on their feet yet even after 4 years. Japan, which pursued this policy for decades, has fared no better.  
The Nominal Interest Rates [2003-2012]are given in the chart below.
The Real Interest Rates [2003-2012] are given in the chart below.
The first lie -RBI is factually wrong when it says that real interest rates were high during high growth years of 2003-2007- is nailed from above chart. The above chart is prepared from the database of World Bank, who the author would meekly believe, and not of RBI. The real interest rate ranged between 4.5% to 7% in this period. Along with it is automatically demolished his argument that higher savings rate was achieved during this period on the back of low real interest rates, because real interest rates were not low.  
The Inflation rates as measured by annual change in Consumer Price Index are given in chart below
The virtue that author saw in stickiness of core inflation [core inflation is calculated by excluding items that show seasonal volatility in prices. This excludes items like food and energy that majorly affect most Indians] turns into a callous vice when one sees the changes in CPI above. The CPI inflation has remained high above or near 8% of late. The erratic and deficient rainfall of this year has put severe pressure on food prices. The commodity [oil] prices are high because cheap money sloshing around in the world economy is speculating on their price movements [Even PC had made reference to this fact when Ben Bernake and Tim Geithner had come calling]. It is this context that goads RBI to worry over the persisting core inflation at 5.5%. But should context hold up someone out to promote an agenda.

The interview of D Subbarao, is refreshingly focused on facts and shows some real understanding of real economy than the growth maniacs like PC or Surjit Bhalla, who are beholden to global capital. One must thank that RBI has remained an autonomous institution despite government appointing the chief central banker and has not turned into handmaiden of finance ministry.
Now that one has seen how thoroughly hollow the column by Surjit Bhalla is, it is time to have some fun. Yoram Bauman is a stand-up Economist Comedian. He has a short piece on *Shit Happens* in Economics. Taking inspiration from him, I call Bhalla’ column: भल्ले भल्ले शीट [Lovely, Lovely sheet].

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One Response to “Growth Maniacs’ Bhalle, Bhalle, Shit!”

  1. Sadanand Patwardhan Says:

    My arguments above based on the monetary perspective found unexpected support in an article in Financial Express, India Needs a Weaker Rupee, by Gautam Mehta – analyst with BNP Paribas, based on Exchange Rate perspective. Bhalla would argue for a strong rupee because otherwise depreciating rupee would import inflation and harden RBI's hawkish stance, which he wishes it dump for *stimulating investment*. It is known that Faster economic Growth pushes Rupee up, and higher inflation pulls it down. Mehta correctly argues that ^^The rupee faces a push of faster growth and a pull of higher inflation. While the two variables do not affect the currency to the same extent, it is reasonable to assume that in the current context where India’s inflation differential (5-6%) is higher than its growth differential (2-3%), the currency should depreciate…..RBI rather than just seeking to tamp down volatility. It should prevent that 5-10% global risk appetite driven upswings in the currency—such as the one we saw in September when the rupee appreciated more than 7% versus the dollar. With the ‘push’ from relatively stronger growth to be weaker than the ‘pull’ from higher inflation, the rupee will have a tendency to steadily depreciate. RBI should allow such a gradual depreciation to restore the competitiveness of the tradables sectors. Currency is too important to be left to the vagaries of the capital markets^^.The link to article is below:

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